Welcome to the tenth of our daily COVID-19 updates. 27/03/2020.
Welcome to the tenth of our daily COVID-19 updates. 27/03/2020.
A very busy day update wise, at the end of what we know has been a very challenging week for all of us. We are here to help and support you, so please do contact us if you need to.
We are focusing the update today on two key areas – self-employment and furloughing.
Details to support last night’s announcement on the self-employed are limited so our content on this area below is largely focused on practical questions to consider. We do now finally have more definitive guidance on furloughing, so this is covered in more depth.
Please remember we are here to help.
Summary of Key Announcements and Changes
Self-employment Income Support Scheme
We sent out a second daily update yesterday covering the self-employed. We felt that a quick response was important given the relevance of the announcement for you and your clients.
Since the announcement we have looked at the guidance for the grant scheme for the self-employed in more detail. Key points are set out below, together with a number of questions we have already received.
Eligibility
You can apply if you:
· are currently self employed or a member of a partnership.
· have submitted your 2018/19 tax return (although you still can before 23rd April if you haven’t). HMRC will use the data they hold for 2018/19 to identify those eligible.
· have traded in 2019/20.
· are trading when you apply, or would be had it not been for Covid-19.
· intend to continue to trade in 2020/21.
· have lost profits due to Covid-19.
· have self employed or partnership profits which have been less than ￡50,000, either for 2018/19, or taken as an average over 2016/17 to 2018/19, and those profits must have constituted more than half of your average taxable income for those periods.
HMRC will use the data they hold for 2018/19 to identify those eligible.
FAQ’s on eligibility
“I’m a director of my limited company, am I eligible?”
You may still consider yourself self employed if you run your own limited company. Like me, you are not and we will need to look at the guidance for furloughing under the job retention scheme, see below.
“I have recently incorporated, am I eligible?”
You may have recently incorporated. At this stage, we consider the first bullet point to be relevant, as HMRC guidance says, “You can apply if you’re a self-employed individual or a member of a partnership”. This suggests HMRC will look at your current status.
Again, directors of limited companies will have to look at furloughing under the job retention scheme.
“I am about to incorporate my self-employed business. Should I go ahead with this?”
We have been asked if clients are considering incorporation, whether they should defer. As mentioned above, at this stage the guidance makes it clear that you have to be self-employed or a member of a partnership if you want to apply. Our advice is to consider deferring incorporation until further clarity is obtained. To claim you must also intend to trade as self-employed or as a member of a partnership next year, which won’t be the case if you have incorporated.
“I have other income as well as my self-employment. Am I eligible?”
The scheme guidance provided to date suggests it will exclude those clients who, for example, have a large salary, high rental income, or substantial investment income, which means their self-employed earnings are less than the remainder of their taxable incomes.
“My tax return is late for 2018/19, what should I do, and will I still get a penalty?”
HMRC have given clients until 23 April to submit 2018/19 tax returns so you should contact any self-employed clients for whom you haven’t submitted their tax returns yet to encourage them to do so. Although HMRC have said tax returns should be submitted by 23 April, they haven’t specifically said penalties will be waived, however we would still encourage clients to take this opportunity to bring their tax affairs up to date.
And whilst it’s not clearly set out, there must be a risk around eligibility if there is a 18/19 tax return outstanding.
The Calculation
The grant under this scheme will be taxable and is expected to be 80% of the average profits for 2016/17 to 2018/19.
This will be calculated by adding the profits for the years 2016/17 to 2018/19 and dividing by 3.
It is anticipated that if you have only traded for 2017/18 and 2018/19, those profits will be added together and divided by 2.
And in the case of profits for a client who started trading in 2018/19, only those profits will be considered.
A maximum grant of ￡2,500 per month for 3 months has been suggested at this stage.
FAQ’s on calculations
“I started trading part way through a tax year, will that affect my claim?”
If a client commenced business in either of the 2016/17, 2017/18 or 2018/19, we do not know at this stage how this will affect the calculation. For the time being we are working with full years, but we appreciate the outcome for someone commencing in business at the beginning of a tax year is likely to be more favourable than a client who started trading at the end of a tax year.
“My client has asked if I can omit expenses and disclaim capital allowances so their profits will be higher, what should I do”
It is difficult to see that increasing profit in this way will be make sense. Any unsubstantiated omission of expenses would of course be fraudulent and cannot be considered. Any legitimate increase to profitability would result in additional income tax and class 4 NIC on those profits, which may outweigh the benefits of increased profits on the averaging calculation.
For example, additional profits of ￡5,000, assuming the taxpayer already has profits in excess of their personal allowance, would suffer tax of ￡1,450, and if trading commenced in 2018/19, would only increase the claim for the 3 months by ￡1,000. The additional ￡1,000 would be further diluted if the client commenced trading in 2017/18 or 2016/17.
Application Process
At this stage, clients are not able to apply for the scheme yet. Client’s will be contacted by HMRC if they are eligible for the scheme and will invite you to apply online. HMRC are encouraging taxpayers not to contact them in the meantime as doing so will delay the introduction of the scheme.
After clients have applied, and HMRC have checked eligibility, they will be contacted by HMRC to confirm the level of the grant. As above, the grant is taxable and is also declarable for tax credit purposes.
FAQ’s on the application process
“I think I’m eligible, but I haven’t been contacted”
We will be able to use the guidance already available to assess whether clients should be eligible. It will take some time for HMRC to contact clients, and this is anticipated to be after 23 April 2020 based on their deadline for submitting outstanding 2018/19 returns.
“I’ve been contacted in connection with this scheme, but it is outside of gov.uk, should I provide them with my details”
The scheme will only be available through gov.uk, so if you have been contacted by text, a telephone call, or by email saying you can claim financial help or a tax refund, do not give them your details.
Coronavirus Job Retention Scheme (CJRS) – significant update
Yesterday the Government published a significant update in respect of the Coronavirus Job Retention Scheme.
HMRC have now provided updated guidance notes for both employees and employers.
As a result of this, the ICAEW, have also updated their latest guidance on how they assume the scheme will work.
You will see that the ICAEW had previously anticipated that the maximum grant per employee would be the lower of 80% of ‘an employee's regular wage’ and ￡2,500 per month.
However, it is now confirmed that the employer will instead receive a grant from HMRC to cover the lower of 80% of an employee’s regular wage or ￡2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised wage. Fees, commission and bonuses should not be included.
You will also see from the guidance that, at a minimum, employers must pay their employee the lower of 80% of their regular wage or ￡2,500 per month. An employer can also choose to top up an employee’s salary beyond this but is not obliged to.
HMRC go on to say that they will issue more guidance on how employers should calculate their claims for Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions, before the scheme becomes live.
Due to the nature of the current crisis, we have all been forced to make assumptions without the benefit of being able to confirm critical points. We need to make it clear to clients that we are updating them with the latest indications on how the scheme will work but uncertainties remain.
How much to pay employees?
HMRC have advised that for full time and part time salaried employees, the employee’s actual salary before tax, as of 28 February, should be used to calculate the 80%. Fees, commission and bonuses should not be included.
For details on how much to pay employees whose pay varies, please see the HMRC guidance note.
In many cases, where a member of staff is furloughed, the figure to enter into the payroll software will be the actual gross salary at 28 February, multiplied by 80%. This is of course subject to the rules where pay varies and the stripping out of fees, commission and bonuses.
Directors
We have had a large volume of queries regards directors being eligible to claim to be furloughed and benefit from this scheme.
There are many situations where a claim could be made. For example, if a director had recently been appointed to the board of a company and it was decided the part of the business they led was not needed due to COVID-19, provided they met the relevant criteria, then a claim could be made. The other directors would continue to run the business and deal with the affairs of the company.
However, to be eligible for the subsidy when furloughed, an employee cannot undertake work for the company. This includes providing services or generating revenue.
For some directors, this may be a possibility. However, in the majority of cases, where a client is a single director of a company it is unlikely they will be able to avoid undertaking work for the company and would likely be found to have failed the furlough conditions. The claim must be for a minimum of 3 weeks and this again, could be tricky to adhere to.
As the salary taken by most directors will usually be ‘low’ and topped up with dividends, there may be very little salary to claim.
We would therefore urge caution and the question must be – can you actually meet the conditions and no longer do any work for your company? We suspect that in many cases, the answer would be no.
HMRC will retain the right to retrospectively audit all aspects of any claims.
We are hoping for further clarification in this area as this seems totally unfair.
Claims
HMRC have provided some more details on how claims will be made here. You can’t yet make claims for the grants, so you will need to consider carefully how youmanage their cashflow. We do have software and skills that can help.
Grant payments received under the scheme must be included as income in the business’s calculation of its taxable profits for Income Tax and Corporation Tax purposes.
You will then be able to deduct employment costs as normal when calculating taxable profits.
Payroll – Furlough related
As HMRC have issued guidance confirming that the cap for furloughing is now ￡2,500 gross, PLUS other Employers costs. This differs from previous views/guidance given by various external bodies including ICAEW, which has been reflected in our previous daily updates.
Unfortunately, it’s inevitable in such a fast-changing situation that we will see conflicting guidance and occasional corrections.
Croner TaxWise
Croner TaxWise have provided us with templates for the furlough letter and briefing notes.
This a fast moving area and those templates will only be correct at the time of publishing. We will e-mail to clients and include the Croner Taxwise contact details for clarification.